Sand: A Valued Resource?

09/24/2014 10:00 am EST

Focus: ENERGY

Frank Holmes

CEO and CIO, U.S. Global Investors, Inc.

Frank Holmes, CEO of US Global Investors, discusses the energy renaissance in the US and offers a way to play probably the least precious of all materials, sand.

Steven Halpern:  Our guest today is Frank Holmes, CEO of US Global Investors, a leading mutual fund company best known for its global expertise in a variety of resource sectors.  How are you doing today, Frank?

Frank Holmes:  I’m great.  It’s good to be here.

Steven Halpern:   Thank you for taking the time to join us.  Just a few years ago, investors were worried about dwindling global oil reserves but that has changed considerably in large part due to increasing supplies of shale in the US.  Could you provide our listeners with a brief overview of the background of the situation?

Frank Holmes:  Sure.  You know Steven, your audience always impresses me and your curiosity to explore and discover new opportunities is a wonderful reflection of your intelligence.  You go everywhere.  

So, let’s focus here on sands, and oil, and fracking—the renaissance, the energy renaissance that America’s undergoing—and a big part of my recent blog I comment on is finding opportunities beyond direct shale plays and one of the key developments has been sand, the use of sand, specialized quartz sand.

Steven Halpern:   The analyst US Global will typically look at resources with well recognized value, ranging from oil and copper to gold, silver, even diamonds. Here you’re referring to sand, probably the least precious of all materials; could you explain where you see value there?

Frank Holmes:  Sure.  You know, in fracking, sand could be used as—as they call it—proppant, and once the shale rock formation is injected with water and chemicals, it is the proppant—normally treated sand—that keeps the newly formed cracks open and out there made in the rock and this allows natural gas or crude oil to be extracted more easily.  

This sand has created—the use and need for sand has been astronomical.  If you take a look at the sheer demand I think it’s pushing over almost 100 billion pounds that are going to be used this year, which is quite significant and then it creates jobs; all throughout the country sand is being shipped down to Eagle Ford, just south of San Antonio.  I get stuck sometimes behind the trains in the morning and I can see the trains bringing along this number of sand.

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What’s really important to recognize is the use of sand has improved dramatically and that it’ll take up to 100 railcars per well.  They used to use 2000 pounds of sand, sorry, tons of sand, 2500 tons of sand.  They’re now pushing using 8000 tons of sand to be pumped into each well, so that’s why you’re using up to 100 railcars of sand per well.  

The quality of the sand is also important, so now you have many of these oil and gas companies scouting throughout the country from northeast to northwest, Missouri to the Chicago area, that region, Illinois looking for this special quality sand—Michigan—and shipping it down to Texas.

Steven Halpern:   Offhand a lot of people wouldn’t believe there are investment opportunities in sand but you found two companies that are direct beneficiaries of this fracking expansion and the need for sand.  One of those that you highlight on the supply side is Emerge Energy Services (EMES).  Could you tell our listeners a little about this company and how it’s involved in this area?

Frank Holmes:  Sure.  You know it’s interesting to watch this company evolve because it originally; the sand; they were supplying sand for roofing, construction, glassware, golf courses, and seeing this substantial increase in demand needed for the oil and gas drilling across the United States, they rotated into basically filling that void and they went public.  

They went public about 18 months ago and the stock has basically gone public in May of 2013 at $17 and hit over $120 a share.  If you take a look at the demand for sand, as I mentioned earlier, it’s only going to grow.  

It’s estimated that the needed sand is going to go from—used to be 2500 tons of sand per well—now 8000; it could go up to 15,000 pounds of sand that are necessary for each of these wells.  I’m getting my pounds and tons a little confused here because I’m so excited about the need that’s necessary.  

When we look forward, we believe that you’re going to continue to see shipping as a key factor of this high quality sand, so Emerge is one of those great companies that are providing this high quality sand necessary for fracking.

And then, how they get moving this sand across the country? Well, we need the cheapest form of transportation is railway and Union Pacific Corp. (UNP) is an example of one railway company that has seen a 26% increase in hauled railcar load of sand since 2013.  

Steven Halpern:   Fascinating topic; I really appreciate you taking the time to share these ideas with us today.

Frank Holmes:  Happy investing.

Steven Halpern:   Thanks.

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